Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your bid bond needs.
What Are Alabama Bid Bonds?
Alabama bid bonds are surety bonds that provide protection for project owners against the financial harm they can experience when the winning bidder for a construction job pulls out and does not accept the contract. Having to start the competitive bidding process over again entails significant costs and delays. If a bidding contractor violates the terms of the surety bond agreement, the project owner can file a claim for monetary damages.
Who Needs Them?
Alabama bid bonds are required for certain state-funded projects that fall under Alabama’s “Little Miller Act.” This is the state’s version of the federal Miller Act that mandates bid bonds, performance bonds, and payment bonds for larger projects funded by the federal government.
Contractors bidding on projects that are subject to Alabama’s Little Miller Act must furnish the awarding authority with a bid bond for 5% to 10% of the bid amount, with a maximum of $10,000. The one exception is for transportation projects, for which the maximum bid bond amount is $50,000.
It’s becoming more and more common for private project owners as well as public awarding authorities to require bid bonds from potential contractors.
How Do Alabama Bid Bonds Work?
Every Alabama bid bond involves three parties with different, but intersecting, interests.
- The obligee is the awarding authority (project owner) requiring the bond,
- The principal is the contractor purchasing the bond, and
- The surety is the bond’s guarantor.
The principal is legally obligated to pay all claims the surety finds to be valid. But the surety guarantees the payment of claims by establishing a line of credit for the principal when the bond is sold. The surety will draw against that line of credit to pay a valid claim initially, creating a debt that the principal must repay. The surety can take legal action against a principal who fails to repay the debt according to the terms of the surety bond agreement.
How Much Do They Cost?
Alabama Bid bonds are relatively inexpensive, selling for an annual premium that is only a small percentage of the bond amount. The premium cost is calculated by multiplying the required bond amount by the premium rate assigned by the surety through an underwriting risk assessment. The primary risk to the surety is not being repaid for claims paid on the principal’s behalf. That risk is measured by the principal’s personal credit score.
A high credit score is a reliable indication that the risk to the surety is low, which means the premium rate will also be low. A low credit score strongly suggests a higher risk level, which results in a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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